“At a market cap of $755 billion (at point of writing) Facebook’s per user value is around $288. If Facebook is some leading indicator for the pinnacle of per user value for social media, then at $50 billion for the roughly 85 million American users, TikTok’s per user value would be $588.”
As talks of TikTok’s ban or potential acquisition picks up steam, Microsoft is navigating rocky waters in an attempt to extrude some kind of deal amid the crossfire between Beijing and Washington – not to mention the multitude of big tech forces shaping the narrative. Whether the deal takes place, for what price and for how much of TikTok’s operations will have a resounding impact on the competition between Instagram, Facebook, Microsoft and even Amazon.
Let’s break down speculation around the deal first:
Price: The estimated value of the US arm is currently ranging between $20-50 billion. The exact amount depends on a plethora of factors and several discordant stakeholders coming to consensus. The best speculative guess we can make has to be grounded in as much context as possible.
Bytedance valuation: Bytedance, TikTok’s parent company has a private-market valuation of more than $100 billion, reaching up to $140 billion based on a small private sale made by early stakeholder Cheetah Mobile. Some analysts have predicted that Bytedance could IPO at a valuation north of this, going up as far as $180 billion.
TikTok share of Bytedance: Bytedance revenue in 2019 was estimated to be around $17 billion, of this TikTok (including DouYin) revenue made up about $179.6 million.
TikTok projected revenue 2020: $1 billion, 315 million downloads globally in Q1 (TikTok and DouYin)
Tiktok projected revenue 2021: TikTok expects to bring in $6 billion in revenue in 2021 according to TikTok management but outsiders have expressed that this is an aggressive estimate, putting a more reasonable range at around $4 billion.
American Share of TikTok: Of the 2019 revenue China’s DouYin arm accounted for $122.9 million (69%) while the American market accounted for about $36 million (20%). In April of 2020 in-app purchases on the app increased ten-fold to $78 million where the Chinese market accounted for 86.6% followed by an 8.2% contribution from the American market. At the moment it is predicted that there are about 85 million monthly active TikTok users in the U.S.
There have been reports of investors valuing TikTok around $50 billion in the takeover bid, this is approximately 50 times its projected revenue for 2020. Many publications have compared this to SnapChat’s market capitalization which sits around $33 billion at the moment (15 times its 2020 projected revenue). While Snapchat exists within the same social media ecosystem the comparison has to account for two factors.
- TikTok vs Snapchat’s position in the growth cycle
- TikTok vs Snapchat’s core proposition
Snapchat is vastly different on both fronts. For this reason, it’s difficult to gauge whether the current 50x pricing model is absurd or not in relative terms. A reference point, despite being more distant, that I find more revealing is the 2012 Facebook acquisition of Instagram for $1 billion.
At the time Instagram represented an up and coming giant in the social media landscape (which in and of itself was quite new) and was doing for photo sharing what TikTok has been doing for short video content (at least, doing more effectively than any of its predecessors). Facebook acquired Instagram at an average price of about $30 per user, when its own platform was valued at about $100 per user. Given that social media in 2012 represented a far less developed market and the almost ten year lead time, it’s difficult to directly compare Instagram to TikTok. Today Instagram is valued at over $100 billion and has over 1 billion users, placing its per user rate at $100. At a market cap of $755 billion (at point of writing) Facebook’s per user value is around $290. If Facebook is some leading indicator for the pinnacle of per user value for social media, then at $50 billion for the roughly 85 million American users, TikTok’s per user value would be $588 (this doesn’t change significantly when accounting for the Australian/Canadia/NZ markets given low penetration).
Where Instagram made up less than a third of Facebooks per user value at the point of acquisition, TikTok is hovering around double or more and more than 5x Instagrams current per user value. Of course, Instagram had no revenue generation and far few users (33 million) in 2012 while TikTok’s rapid growth has made it a giant in its own right. What we’re then looking at, assuming a $50 billion valuation is a complete market disruptor. Even at a $30 billion takeover bid, Microsoft would be paying $352 per user.
Microsoft isn’t negotiating a price range between $20-50 billion based on revenue projections of which a majority are derivative of the Chinese Douyin market, they are at the table on the basis of becoming potentially larger than the largest social media platform in the world. Rather than how this valuation pans out for investors, the longer-lasting and more pertinent question is how does this change the entire social media landscape and Microsoft’s role in the next decade. With such weighty questions up in the air, a 50x pricing model of revenue projection doesn’t seem so absurd – rather a significant turning point in the decade’s narrative around big tech.